The second of the three major types of assurance services that you might encounter in the world of church and non-profit organizations is called a review. My previous blog was about compilations, the most basic service provided by a CPA firm. Which of these would benefit your organization most? The answer depends primarily on expectations by granting agencies or creditors, the volume of your financial activity or the complexity of your organization itself. Each engagement requires a different amount of work by the accounting firm. Fees for reviews will be higher than for a compilation because of the increased time that a review takes over the compiled financial statements.
Reviews are more complicated assurance services than compilations. Where compilations are, in the simplest sense, the gathering and reporting of an organization’s financial data in a format according to generally accepted accounting principles (GAAP), reviews require the CPA to perform inquiries and analytical procedures as well as the procedures required in a compilation. Inquiries include discussions with management as well as examinations of client records, payments or other specific transactions, or any other entries relating to an account or accounts. Analytical procedures are “evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data (according to the American Institute of Certified Public Accountants’ (AICPA) audit standards). In layman terms, a review is asking questions and investigating what does not make sense in light of those answers and the financial statements being reviewed.
Like compilations, reviews are performed in accordance with the Statements on Standards for Accounting and Review Services adopted by the AICPA. The inquiry and analytical procedures will give the CPA firm a reasonable basis to give “limited assurance” on the financial statements being reviewed. The CPA will be able to identify any concerns that the organizations’ financial statements have material misstatements that would prohibit her from completing the review. But, like compilations, a review does not address internal controls, testing accounting records or other procedures performed in an audit. The CPA’s knowledge of your industry is essential so that you, the client, are confident that the will be able to identify any material misstatements that would require adjustments to the financial statements. If no issues are discovered that the client cannot fix, the report will be issued with the limited assurance noted above.
The major difference between a review and a compilation is that the review goes beyond reporting what management has stated in the financial statements to looking over the financial statements and the related data with a big picture prospective. An audit comes in and tests the balances of the specific accounts that make up the financial statements. The review tests the financial statements through inquiries and comparisons between years as well as comparing the relationships between accounts. For example, if payroll increased significantly, did the number of employees increase or were there large increases in individual pay. If contributions increased significantly, did the number of donors increase or was there a large individual contribution. A review asks the question “does it make sense?”
I hope this explanation and the previous article make sense and have given you a better understanding of what compilations and reviews consist of. You can the seen the increasing complexity from one to the next. In Part Three of this series I’ll explain audits in more detail.
The certified public accounting firm of Cox and Associates CPAs has been serving churches and nonprofit organizations since 1996. Our goal is to achieve excellence in the provision of tax, accounting, auditing, financial education, consultation, and other related businesses services to our clients. Call us with your questions at (281) 399-8153.